Tài chính ngân hàng - Equity valuation: Applications and processes

Equity Valuation:Applications and ProcessesPresenterVenueDateValuationValue EstimateEstimating Variables Related to Future ReturnsExamining Values of Comparable AssetsEstimating Proceeds from Immediate LiquidationIntrinsic ValueAsset Value Given a Complete Understanding of an Asset’s Characteristics“True” or “Real” ValueNot Always Equal to Market PriceAsset MispricingEfficient Market Theory: Intrinsic value = Market priceVE – P = (V – P) + (VE – V) Sources of perceived mispricingMarket errorAnalyst error Going Concern vs. Liquidation ValueGoing concern value: Firm will continue in its business activitiesFirm will continue to sell its goods and servicesFirm will use its assets for value maximizationFirm will access its optimal sources of financingLiquidation value: Firm will be dissolvedFirm assets will be sold separatelyGoing concern value > Liquidation valueValue added from asset synergyValue added by managerial skillsOther Definitions of ValueFair Market Value Well-informed, willing buyer and sellerFair Value Financial reportingInvestment Value Value to specific buyerUses of Equity ValuationStock SelectionIs the stock under- or overvalued?Inferring Market ExpectationsWhat does the security price say about expectations?Evaluating Corporate EventsWhat is the effect on firm value from a merger?Fairness OpinionsIs the value paid for the firm fair?Uses of Equity ValuationEvaluating Business StrategiesWhat is the effect on firm value of a new strategy?Communicating with Analysts and ShareholdersHow is firm value being affected? Appraising Private BusinessesWhat is the value of a private firm?CompensationWhat is the value of equity compensation?The Valuation Process1. Understanding the BusinessIndustry and competitive analysisFinancial statement analysis2. Forecasting Company PerformanceForecast sales, earnings, dividends, and financial position3. Selecting the Appropriate Valuation ModelBase selection on company characteristicsThe Valuation Process4. Using Forecasts in a ValuationUse judgment in valuation application5. Applying the Valuation ConclusionsInvestment recommendationsValuation opinionsStrategic decisionsUnderstanding the Business:Industry Analysis (Porter’s Competitive Advantage)RivalryNew EntrantsBuyer PowerSubstitutesSupplier PowerUnderstanding the Business:Competitive AnalysisCost LeadershipDifferentiationCost FocusDifferentiation FocusLow CostDifferentiationBroadTargetMarketNarrowTargetMarketIssues in Financial Statement AnalysisNonnumerical AnalysisRegression to the MeanMature Firms vs. Start-UpsSources of InformationQuality of EarningsQuality of Earnings ExamplesExamplePotential InterpretationFirm A recognizes revenue early using bill-and-hold salesPotentially poor underlying performance, reported income , and future income Firm B capitalizes product development expensesPotentially poor underlying performance, reported income , and future income Firm C has large amounts of off-balance-sheet financingLiabilities are understatedFirm D increases its loan-loss reservesCurrent income  so as to inflate future performanceQuality of Earnings Risk FactorsPoor quality of accounting disclosuresRelated-party transactionsFrequent management or director turnoverPressure to make earnings targetsAuditor conflicts of interest or frequent turnoverIncentive compensation tied to stock priceExternal or internal pressures on profitabilityDebt covenant pressuresPrevious regulatory/reporting issues Valuation ModelsAbsolute Valuation ModelsPresent value modelsDividend discount modelsFree cash flow to equityFree cash flow to the firmResidual incomeAsset-based modelsRelative Valuation ModelsPrice ratiosPrice-to-earnings ratioPrice-to-book-value ratioPrice-to-cash-flow ratioEnterprise value multiplesChoosing a Valuation ModelWhat are the characteristics of the company?What is the availability and quality of data?What is the purpose of the valuation?Other Valuation Model IssuesSum-of-the-Parts Valuation Sensitivity AnalysisSituational AdjustmentsAnalyst RolesSell-Side AnalystsBuy-Side AnalystsCorporate AnalystsIndependent AnalystsAnalyst ResponsibilitiesThe CFA Institute Code of Ethics:Members of CFA Institute must use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.Research ReportsEffective research reports include:Timely informationClear, incisive languageObjective and well-researched informationClearly distinguished facts and opinionsConsistent analysis, forecasts, valuation, and recommendationsSufficient disclosure of informationKey risk factorsDisclosures of conflicts of interestSummaryValuationIntrinsic value: Value given a complete understanding of the assetTypically assumes the firm is a going concernIntrinsic value ≠ Market priceAsset MispricingActive investors seek to exploit market mispricingActive investors must believe that the market will correct itself within the investment horizonOther Uses of Equity ValuationMarket expectation extraction, firm strategy and event evaluation, fairness opinions, private firm valuation, shareholder communications, compensationSummaryValuation ProcessSteps: Industry and competitive analysis, forecasting, model selection, valuation, recommendationsIndustry analysis: Rivalry, new entrants, substitutes, supplier power, buyer powerQuality of earnings is crucialValuation ModelsAbsolute models: Present value and asset-based modelsRelative valuation models: Price ratios and enterprise value multiplesModel should contain sensitivity analysis and situational adjustmentsSummaryAnalyst RolesBuy-side, sell-side, corporate, and independent analysts Analyst ResponsibilitiesCFA Institute Code of EthicsCFA Institute Standards of Professional ConductResearch reports should be timely, clear, incisive, objective, and well researched; distinguish between fact and opinion; be consistent and informative; contain risk factors; and disclose conflicts of interest